What is Real Estate Wholesaling?
Real Estate Wholesaling is when the "wholesaler" makes a contract with a home seller, which in turn markets the home to buyers. The "wholesaler" will then award the contract to one of the buyers.
A profit is earned by the "wholesaler" by subtracting the price of the contract made with the buyer to the contract with the home seller. So in short, real estate wholesaling is selling other people's homes who either don't have the time, influence, or skills to do it.
In wholesaling, there are a lot of cases, where the contract is time-limited or has a closing date. In order to avoid this, choose contracts that allow you to back out if you can't find any buyer. This helps a lot in limiting your losses.
So if you want to be a "wholesaler", the skills you need to have is knowledge of the real estate market and connections with a network of investors or potential buyers.
- What is the Goal of Real Estate Wholesaling?
- Wholesaling Real Estate For Beginners: Understanding the Pros and Cons
Assignments or in the longer term, assignment of contract is simply the selling of a contract. Which means the assignment is the "wholesaler" is selling the contract to a buyer. Take note that the "wholesaler" isn't selling the property but the contract with the home seller to buy the property.
So in an assignment, as a "wholesaler" you will not own the property throughout the whole process. Instead, you buy the rights to buy the property in the form of a contract. Always have a lawyer expert in real estate to help you with the contract.
Pros and Cons of Assignments
The advantage of an assignment is that you won't have to pay closing costs or fees as you're only selling a contract to a buyer.
The downside, however, is that the buyer will have to sign an assignment contract. The assignment contract has the information on how much you gain as profit as an assignment fee.
This makes the buyer skeptical of the true value of the property and may think that it's overpriced depending on the profit. But it makes up for not having to incur expenses using an assignment contract.
What is an Assignment Fee?
An assignment fee is a profit the wholesaler makes as you sell an assignment contract. The buyer and wholesaler can negotiate how much the assignment fee should be. The mode of payment is also shown under the Assignment of Real Estate Purchases and Sale Agreement.
Usually, a deposit or down payment is paid when the Agreement is signed. Only after when the deal closes that the whole amount will be paid.
In Double Close, at some point in the process, you will own the property. It's typically a buy-and-sell but at a much faster pace. Why it's called double close is because there are two closes throughout the process.
The first is the transaction between you and the home seller. You buy the property from the home seller. And then the second transaction is when you, the "wholesaler", sell the property to another buyer.
Take note that each of the transactions will have its own cost, fees, and settlement statements. So you have to treat them as individual transactions.
Pros and Cons of Double Close
The advantage of a double close is that the buyer won't be able to see the initial purchase price of the property. This is because the transaction was made within another independent transaction.
This keeps buyers from knowing how much profit the "wholesaler" is actually making. So you need to have a good smooth sales talk to buyers about the value of the property.
The downside of a double close, however, is its expenses. In the initial transaction, the closing costs and fees will be shouldered by you. Also during the closing deal, the closing attorney will use your buyer's fund to pay the home seller.
- What is the Difference Between an Assignment of Contract and a Double Closing?
- Contract Assign vs Double Close
What is a Settlement Statement?
The settlement statement is a list of all expenses like fees made by both the buyer and seller throughout the whole transaction. This is also known as HUD-1 (under U.S Department of Housing and Urban Development). In double close, you will have two settlement statements overall. One each for the first and second transaction.
Traditional close is when the title of the property is transferred to the "wholesaler" and all of its expenses about the purchase is paid and settled. Moreover, traditional means the method of usage is in traditional means. For example, door-to-door, newspaper ads, inspecting properties personally.
Modern technology have also keep-up with real estate and has now come up with e-closing. A more modern technological approach to real estate. E-closing makes use of modern technology like the computer, internet, smartphones to make transactions fast and easy.
Pros and Cons of Traditional Close
The main advantage of traditional close is mainly you get to monitor the transaction at a personal level. Which means you're less likely to get scammed by a bogus buyer or seller if you're buying.
The disadvantage of a traditional close is that it takes up your time and you'll incur additional expenses like gas etc… for meeting with potential buyers and touring the property.
Is Wholesaling Illegal?
No, it isn't. But there are certain laws that you need to follow before you start. The main root problem with "wholesaling" is that some claim it to be acting as a "broker" and a broker needs a license to operate.
To make sure check the laws within your state and ask consultations from experts about real estate wholesaling within your state. Each state defines the term "broker" in different forms.
Safe Way to Wholesale
Are you unsure or not confident that your wholesale practice is legal? Then follow this process so that you're sure of not breaking any laws.
- Get a License - Investing on getting a license helps eases you up on illegalities. Plus, having a license will make buyers feel secure in their transactions with you. All in all, it's a good investment.
- Buy and Sell - In order to avoid the "broker" confusion, it's best that you do wholesale through a double-close.
How can I get Started Without Any Money?
If you lack the money to start with real estate wholesaling, you need to make up for it with effort. It takes time to land your first successful close. So if you don't have the perseverance and patience, then you should try another wealth-growth investment.
- For Sale by Owners - You'll find owners who're selling their properties without real estate agents. Usually, the reason is that they want to minimize costs. Reach out to them and you may find a deal. You can use strategies like lease option or owner finance to help you with.
- Craigslist Ads - There are also people selling their property through Craigslist. Contact them and reach out. It's important that you call in well-prepared.
- Cold Calling - an old school strategy. Map out a list of potential home sellers (like divorce, job loss, empty lot, moving). Attempt to contact them and try to come up with a deal.\
What Are the Risks Involved?
- Wholesaling isn't a guaranteed income - in 3 months you might only be able to land only 1 deal or even nothing at all. It's not a steady income at all. There's also no insurance or retirement options compared to a regular job. If you want to do this full-time, then secure a safety fund and learn how to manage your finances.
- Deals can Fail - not all deals are guaranteed you'll be able to close. So you have to be mentally and financially prepared when that happens. Buyers have the right to back out from a deal so always have a backup plan when dealing.
- Sweet Deals are Rare - It's hard to find sweet deals within the market. You're looking for properties that are being sold below their true property value and that is very rare. Don't expect to have a sweet deal every time. It will happen very rarely.
- Finding a Buyer before Contract Expires - At times, you won't be able to find a buyer within the period of the contract. So make sure you have a backup for this. An example is if you get a right to back out of the contract.
Where to Buy, Sell, and Get all the Paperwork?
It's better to start off within your area. You're more familiar and you'll get instant connections. Having a license would be an added bonus. Also, make sure you have all the necessary paperwork. At least you'll need a
- Purchase Contract
- Assignment Contract
- Flex Option Contract
- Subject-to-Hazards Disclosure Form
- Contract Addendum
It's also better to consult first about legalities to avoid any illegal activity in your part. To start off, make a buyer's list and a seller's list. This will help you navigate more efficiently in real estate wholesaling.